In the second quarter of 2008, investors witnessed further declines in broad market
indexes as the threat of continued increases in energy costs caused significant
concerns over the fate of the U.S. economy. With oil at $142 per barrel at the end of
June, approximately double the price of June 2007, investors wonder if the worst is
still in store. Interestingly, in April some market commentators were saying that the
turnaround was in sight while others, like our firm, were hunkering down waiting for
the other shoe to drop. Now it seems that things are moving at such a trajectory
that the global economic environment may be speeding into the storm. Perhaps this
velocity means that the storm will get worse before it gets better but that the pain
will be quick rather than prolonged. Even without prolonged pain, the U.S. and
world economies will not be unscathed.
The U.S. Federal Reserve decided to leave interest rates unchanged in the 2nd
quarter, while the inflation conscious European Central Bank raised rates. These
decisions had a dual effect of further lowering prospects for the U.S. Dollar and
raising the expectations of higher oil prices. Even as demand for oil began to
decline, oil expenditures reached 7% of GDP worldwide, a level not seen since 1978.
Prices of other commodities such as natural gas and precious metals continued to
increase as well.
In spite of increased oil prices, the U.S. labor market stayed stronger than otherwise
expected with unemployment at a relatively tame 5.5% and with average hourly
wages climbing by 0.3%. Anecdotally, our firm received reports from numerous
domestic firms that were moving production back to the U.S. from Asia because
shipping costs related to energy were offsetting any cost savings from overseas
labor. In fact, the U.S. Department of Labor reported in June that import prices
were up 15% year-over-year. We expect that increased U.S. labor demand from this
trend, coupled with lower labor supply from the demographic trend of boomers
leaving the workforce will increase labor costs at a faster rate in the U.S. The issue
for emerging market investors is that these markets may be politically less stable as
workers are forced to do without improved consumption ability and are forced to
compete for jobs through depressed wages to offset the increases in energy costs.
The inflationary effect of domestic labor cost pressure is likely to cause the Federal
Reserve to increase interest rates in the near-term. The positive of potential interest
rate increases and import declines is that both will help bolster the value of the U.S.
dollar, which may cause energy prices to pull back, although not to pre-2007 levels.
These interest rate increases raise concerns related to corporate earnings and further
emphasize the importance of fundamental soundness of U.S. companies. Not only
will these corporations be dealing with increased energy and wage costs, but the cost
of capital is likely to increase as well. Many of these companies will look for growth
opportunities in a slower economy and merger activity is likely to increase although
the cost of capital funding for acquisitions may hamper this.
Housing inventories nationally continued to stay at historically high levels with an 11
month supply of existing homes, versus the historical average at 4.6 months
according to the National Association of Realtors. This indicates continuing declines
in home prices. However, the expectation of home price declines is not showing up
in retail sales numbers which grew by 1.0% in May despite increases in fuel prices.
Federal government tax-rebate stimulus is likely to be the cause and is not likely to
have any long-term effect.
Over the last quarter and year-to-date, our portfolios fared well and were flat in
terms of return as we benefited from energy and commodity exposure as well as
increased foreign currency exposure. U.S. domestic stocks were mixed with
approximately half of the Focus List names in positive territory including Chesapeake
Energy (CHK, NYSE) up 42.93% for the quarter offsetting decreases in consumer
related sectors. Goldman Sachs (GS, NYSE) led an otherwise dismal financial sector.
Our rebalancing algorithms helped take advantage of price volatility between Growth
and Value sectors as Growth investments added positive performance.
In fixed income, we carefully reviewed credit quality and durations, fully expecting
bond markets to have at least as difficult a time as equities over the next 6-12
months. We have continued to take advantage of inflation protected securities in a
diversified fixed income portfolio. Currency positions also provided positive support
led by exposure to the Australian Dollar, up 5% for the quarter.
WHM Capital Advisors, LLC is a financial advisory and wealth strategies firm
headquartered in Columbia, South Carolina, which specializes in valuing companies,
designing exit strategies and managing portfolios for business owners. In addition,
WHM Capital Advisors manages a select number of portfolios for high-net worth
individuals, trusts, and foundations. The firm uses a diversified equity and fixed
income strategy designed to meet the individual objectives of each client.
Contact: William McAfee, Chief Investment Officer
1310 Lady St., The Keenan Bldg., Suite 800
P.O. Box 7426, Columbia, SC 29202
1-877-269-5342
(c) WHM Capital Advisors
www.whmca.com |
